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Suresh Krishnamurthy

INVESTMENTS in UTI Pharma fund can be considered now. The healthcare industry is entering a new phase in the next couple of years. The opportunities that such changes hold could lead to significant appreciation in prices of stocks of listed pharmaceutical companies — both Indian and MNC.

In this backdrop, investors with a penchant for risk can consider enhancing exposures to this fund. Investments in sector funds come with very high risk. Investors need to time their exit and entry into these funds to make money. The risks are only marginally lower than those involved in direct investment in pharma stocks. Importantly, the upside to their financial performance is expected only in 2004-05 and beyond. So, if the competitive advantages of Indian companies are sustainable, the upside to stock prices may be significant.

However, the price trends are likely to be volatile. There is also a need to hedge the risk when necessary. For example, Dr Reddy's is awaiting the outcome of a lawsuit in January 2004.

A favourable outcome could add to earnings significantly while a negative outcome would be perceived as a setback. As such, those who hold investments in the pharma funds should consider buying put options on Dr Reddy's stocks to hedge their risks.

Three funds: Three pharma sector funds are offered by Franklin Templeton, SBI Mutual and UTI Mutual. In terms of three-year performance, there is not much to distinguish these three funds, though SBI Mutual's performance over the last year has been more impressive. However, UTI Pharma's portfolio has a diversified mix of large-cap Indian pharmaceutical companies, affiliates of MNCs and mid-cap bulk drug and formulation producers.

Franklin Pharma fund is focussed on large-cap Indian healthcare companies while SBI Mutual has concentrated exposures to mid-cap bulk drug producers.

A concentrated exposure to the three major segments in the pharma industry is attractive. Large-cap Indian pharmaceutical companies such as Dr Reddy's and Ranbaxy could gain from their forays into the global formulations market in the next few years.

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